BBA partnership audits show high no-change rate, TIGTA says

By Paul Bonner

IRS examinations of partnerships under the procedures of the Bipartisan Budget Act (BBA) of 2015, P.L. 114-74, more often ended with no additional tax liability proposed than for all partnership audits of returns for the same tax years, the Treasury Inspector General for Tax Administration (TIGTA) reported in an audit (Rep't No. 2022-30-020).

Partnerships filing Form 1065, U.S. Return of Partnership Income, for tax years starting Jan. 1, 2018, and after must use the centralized partnership audit regime, also referred to as BBA audits. Partnerships also were allowed to "early elect in" to the BBA procedures for examinations of returns for tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018. In instituting the centralized audit procedures for partnerships, the BBA repealed the previous provisions, which had been specified by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, P.L. 97-248, and are known as TEFRA audits.

Generally, the two regimes differ by the degree to which they encompass a partnership's partners' returns. Although TEFRA required the tax treatment of partnership items to be determined at the partnership level and underpayments of tax determined from adjustments to the partnership return, an examination of those items and adjustments required resolving issues with the partners. The partners were generally responsible for any underpayment. Under BBA, the partnership must, by default, pay any underpayment resulting from adjustments made to the partnership's return. However, the partnership may elect to pay the underpayment by "pushing out" the related examination adjustments to the individual partners for reporting on their tax returns.

While the IRS's decisions of which returns to audit do not depend on which partnership regime applies, TIGTA undertook its statutorily mandated task under the BBA to determine whether the IRS adequately implemented its provisions.

By the end of fiscal year 2021 (i.e., Sept. 30, 2021), the IRS had completed 480 BBA partnership audits, including returns filed for tax years 2026 through 2019. Of those, it closed 376, or 78% with no change. For the Service's audits of all partnership returns for the same tax years that it had closed as of Sept. 30, 2020, the no-change rate was 50%, TIGTA reported.

"IRS management agreed that the no-change rate [for BBA audits] is high," TIGTA reported. However, it said, the IRS "believes that it is too early in the process to analyze and form conclusions about the no-change rate." But, TIGTA said, the IRS had not determined what would be an acceptable rate.

TIGTA also took issue with the IRS's practice of not basing its audit goals on which set of procedures it used, noting that the BBA procedures are intended to lessen the Service's administrative and judicial burden from that of the TIGTA procedures. TIGTA recommended that the IRS set goals and measure whether BBA audits take fewer overall resources to complete and administer than TEFRA audits, with an eye to the no-change rate.

"By not having these targets, the IRS cannot measure the effectiveness of the new audit rules on taxpayer compliance," TIGTA stated.

Furthermore, the no-change rate for BBA audits "suggest[s] that compliant taxpayers may be burdened and noncompliant taxpayers are not being identified," TIGTA said. The 78% no-change rate was based on total returns for the four tax years represented; for tax year 2017 returns, the rate was 85% and for returns for the 2019 tax year, it was 90%.

BBA audits were, however, a relatively small percentage of all partnership audits closed in fiscal years 2019 through 2021, TIGTA noted, with the total, according to IRS Data Books for those years, totaling 21,392, TIGTA said in a footnote.

IRS management also suggested to TIGTA that the higher no-change rates for BBA audits may in fact reflect their greater efficiency: They can be closed more quickly. The IRS also pointed out that examinations that do result in additional tax being assessed take longer — often over a year — and so may have not been captured by the sample's cutoff date.

However, TIGTA said it also compared the number of hours examiners spent on no-change audits (of both types), which it said took 66 hours longer per return, while examinations to which partnerships or partners agreed took, on average, 53 hours per return.

TIGTA recommended that the IRS should study any possible contributing factors to a higher BBA no-change rate, such as how cases are selected, and establish a baseline rate and corrective actions.

The IRS disagreed with this recommendation, saying that it is working to minimize the no-change rate and that a benchmark could violate rules under the Section 1204 of the IRS Restructuring and Reform Act of 1998, P.L. 105-206, which prohibits the IRS from using records of tax enforcement results to evaluate or impose employee production quotas or goals.

TIGTA in turn said it was not proposing that, and cited in support of its recommendation Internal Revenue Manual provisions and Regs. Sec. 801.6(d)(2), which allows disclosure of tax enforcement results for forecasting, financial planning, resource management, and formulating criteria for selecting cases.

The IRS also disagreed with TIGTA's recommendation that it establish overall partnership examination goals and measurements addressing expected outcomes from implementing the BBA audit regime. The Service said it would, however, establish qualitative goals and measures for examiners in following the BBA procedures.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at

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